Medicare

Pete Peterson is back on the hunt to cut “entitlements”—which he seems to define as only Social Security and Medicare—but a new report by my colleagues Dean Baker and David Rosnick at the Center for Economic and Policy Research finds Baby Boomers nearing retirement are likely to need those benefits more than ever. Why? Because the housing bubble led people to believe they were set for retirement. Why save when you have more than enough worth in your house? In fact, why not refinance now and live it up a little? Well, the days of giddily checking Zillow are gone and with it are many an American’s dream of a comfortable retirement.

If house prices stay the same through 2009, Dean and David project the median family headed by a person between the ages of 45 and 54, those in their prime earning years, will have 24.7 percent less wealth than did the median family in this age group in 2004. These families will have accumulated just $113,268 in net worth in 2009, barely $15,000 more than their counterparts in 1989, whose net worth totaled $97,600.

If real house prices fall 10 percent, the median family in the 45 to 54 cohort will see a 34.6 percent loss in wealth compared with the median in 2004, while families in the 18 to 34 cohort will lose 67.6 percent. If prices fall by 20 percent, a more pessimistic – but still realistic – scenario, families in the 55 to 64 cohort will experience a loss of 49.6 percent of their wealth compared to the same cohort in 2004.

Baby Boomers have watched their portfolios expand and contract through the stock and housing bubbles. Without defined benefit pension plans, they are in a scramble against time to save what they’ll need to retire. While some political figures have suggested cutting back Social Security and Medicare in order to relieve pressure on the budget, as a result of the housing crash, the workers who are now approaching retirement will be far more dependent on these programs than workers had been in prior years. These workers will have a very difficult time supporting themselves in retirement even with benefits at current levels.

The fact that workers have so little wealth suggests the need for new mechanisms to promote retirement savings. For example, several states, including California, Connecticut and Washington, are now considering a system of state administered portable retirement accounts which would offer pensions to those who are not currently covered by an employer’s plan. It will be difficult to get Americans to save again, but the government can act to make it easier for workers who want to start.

Jonathan Cohn's article in the American Prospect is the best reporting on health care costs and the federal budget I think I've seen. This is probably the most important part, but the whole thing is worth a thorough read.

Historically, Medicare, like private insurers, has rewarded doctors and hospitals for performing more procedures. (While the payment reforms of the 1980s, so called "diagnosis related groups," helped mitigate that problem, they didn't eliminate it.) But patients don't actually seem to be better off for the extra attention. The proof of this lies in the now-famous work of John Wenn-berg and his colleagues at Dartmouth Medical School. As they and their disciples have repeatedly demonstrated, Medicare currently underwrites vastly different levels of care in different parts of the country. Seniors in South Florida, for example, get a lot more medical care than seniors in Minneapolis -- apparently because South Florida has a great many more doctors (who often overtreat their patients). But statistically, South Florida seniors don't seem better off for the extra care. That means Medicare must be paying for a lot of unnecessary or counterproductive treatments.

That's why reducing unnecessary care (as opposed to simply reducing care, which is what crude increases in cost-sharing would do) is the first key to Medicare's financial survival -- and the efficiency of the health system generally. Medicare could, for example, offer financial incentives to providers that follow established best practices. Medicare could also reward those that make information about its practices and outcomes publicly available. The incentives to do this can be positive, in the form of bonuses, or negative, in the form of penalties. Medicare might also encourage seniors to enroll in integrated practice settings, like the highly regarded Group Health of Puget Sound, which have been shown time and again to offer some of the most cost-effective -- and, by most measures, the best -- medical care available. This is not the same as simply herding seniors into loosely organized managed care systems, only some of which actually integrate care and emphasize prevention the way places like Group Health do.

Number of times that the words "chaos", "crisis", "disaster", "bombshell", and "salvo" appear in a recent Washington Times op-ed on Social Security and Medicare:

Chaos: 4
Crisis: 4
Disaster: 2
Bombshell: 1
Salvo: 1

While this kind of crisis rhetoric may be merited in an op-ed on the Iraq War or global climate change, it seems wildly inappropriate in an op-ed discussing Social Security and Medicare, especially since as Henry Aaron of the Brookings Institution reminds us:

... anticipated budget problems are fully explained by projected growth of Medicare and Medicaid. But the same forces driving public-sector health care spending are also driving private spending. Sensible reforms of publicly financed health care require a systemwide approach. Apart from health care, currently legislated federal revenues suffice to cover all currently projected spending, including all Social Security and other entitlements. The United States confronts a public and private health care spending problem, not an entitlement crisis.

In the cases of Social Security and Medicare, crisis rhetoric is ill-advised not only because the "entitlement crisis" frame is a misleading description of the problem, but also because it feeds public cynicism and apathy. I commend to the op-ed's distinguished authors this short discussion of the pitfalls of crisis rhetoric in public discourse:

....

The language of crisis rhetoric is used almost daily to grab our attention. Policy entrepreneurs fan the flames of crisis—failing public schools, terrorists in our subways and shopping malls, burgeoning government budget deficits, foreign takeovers of homegrown companies, skyrocketing medical costs, the breakdown of traditional family values, and on and on.

Cynics point out this is par for the course in policy debates. Indeed, surly exchanges on late-night news have become a staple of every American’s media diet.

Our politicians have become experts at using crisis-mode language to frame debate over Social Security’s long-term problems and call for reforms—even when the outlook is exceedingly good and Social Security benefits can continue to be paid in full until 2042 when 73 percent of benefits can be paid.

....

Forecasting is always risky business—especially in the case of Social Security where projections almost always understate long-term economic growth and exaggerate the system’s vulnerability.

So why do politicians and pundits continue to wave the crisis flag—not just for Social Security but a multitude of other equally complex and long-term structural problems in the United States?

To some extent, they do it because it does work. Psychologists know that panic negatively affects cognitive processing and decision-making. And so it is with the crisis rhetoric. We debate the terms of policy proposals differently and can more easily be persuaded that something must be done, whether we really need to or not.

The problem is that such distorted debate can lead to actions that are more often regrettable than not. Witness how the war on drugs, launched by President Reagan, led to policies that have America’s prisons overflowing at vast taxpayer and social expense. Yet 20 years later drug use remains virtually unchanged.

With regard to Social Security, the danger of crisis rhetoric is that it causes the public to lose faith in programs based on long-term expectations. From one generation to the next, we expect adjustments to be made in a fair and prudent manner. By chipping away at the public’s psychological sense of security and faith in these programs, exaggerated and misleading claims needlessly create a climate of “social insecurity.”

While a moratorium on the use of “crisis” in political rhetoric would be welcome, its use may simply be too tempting for enterprising reformers (of whatever ideological stripe) to give it up. But if citizens at least recognize such claims for what they are—manipulative rather than analytical—more informed, sober public debates might follow.

One final observation: the kind of proposal the op-ed's authors are pushing would appear less partisan and partial if it applied not solely to two progressive public programs—Social Security and Medicare—but also to regressive tax expenditures like the mortgage interest tax deductions and the exclusions of employer-provided health and pension benefits.